The University of Texas at Austin
McCombs School of Business, Business Foundations Program
ACC 310F: Foundations of Accounting
Class Notes on Long-term Decision Making
Chapter 16 (pages 635 – 647) and the Appendix to Chapter 6
Someday you may decide to buy a house. If so, it's a commitment that should be considered
carefully because if you have to borrow money to purchase the house, typical loans have terms
in the decades. In this section, you'll learn how companies evaluate the implication of similar
long-term time decisions.
Principal is the amount borrowed or invested on which interest will be earned or paid over a
stated number of time periods (n).
Interest is the payment for the use of another’s money and is usually specified at a stated
percentage rate (i).
For this class we will assume that all interest rates are compound
interest rates such that interest is computed on the principal and any interest earned that
has not yet been paid or withdrawn.
A future value (FV) is what an amount now will be worth at a specified point in the future
given a stated interest rate.
A present value (PV) is the value today of an amount to be received or paid at a specified
date in the future given a stated interest rate.
An annuity is a series of cash flows that are constant in amount each time period whose
future value (FVa) or present value (PVa) can be calculated.